Alliance Pharma Regulatory News (APH)

14 Mar 2008 07:01

Alliance Pharma PLC14 March 2008 For immediate release 14 March 2008 ALLIANCE PHARMA PLC ("Alliance" or "the Group") Preliminary results for the year ended 31 December 2007 Alliance Pharma plc (AIM: APH), the speciality pharmaceutical company, ispleased to announce its preliminary results for the year ended 31 December 2007. Financial Highlights • Sales up 6% to £18.2m (2006: £17.3m) • Operating profit* up 39% to £3.6m (2006: £2.6m) • Step change in profitability mid-year, with £1.1m pre-tax profit* in the second half of 2007 • Full year pre-tax profit* of £0.4m (2006: £0.5m) • Cash flow from operations of £4.1m (2006: £1.1m) • Non-cash impairment charge of £3.4m in respect of Posidorm(R) *Before exceptional items Operational Highlights • Acquisition of Forceval(R) rights in China through new joint venture • Successful completion of Phase III trial for Isprelor(R), with encouraging reaction from potential prescribers • Strategy implemented to increase profitability and cash generation • Mid-year reorganisation reduced overheads by more than £1m annually Commenting on the results, Michael Gatenby, Alliance's Chairman, said: "We aregreatly encouraged by the speed and effectiveness of the turnaround in thesecond half of 2007. Following the decisive action we took, Alliance hasdelivered the best six months' performance in its history. The current year hasbegun well. Provided there is no unexpected setback on pricing, we are confidentthat the improved profitability achieved in the second half of 2007 will besustainable through 2008." For further information: Alliance Pharma plc + 44 (0) 1249 466966 John Dawson, Chief ExecutiveRichard Wright, Finance Directorwww.alliancepharma.co.uk Buchanan Communications + 44 (0) 20 7466 5000 Mark Court / Rebecca Skye Dietrich /Catherine Breen Numis Securities + 44 (0) 20 7260 1000David Poutney / Michael Meade / Nick Westlake CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT Business Review After a difficult first half of the year caused by supply issues, the decisiveaction we took to restore profitability proved highly effective. In the secondhalf of 2007, the Group delivered the best six months' performance in itshistory. Turnover in the second half was £10.4m, up £2.6m on the first half, andpre-tax profit, before exceptional items, was a record £1.1m in the second half,helped by additional Forceval(R) sales as wholesalers and pharmacies restocked. As a result, full-year turnover was £18.2m, a 6% increase on the previous year(2006: £17.3m). Pre-tax profit, before exceptional items, was in line withexpectations at £0.4m (2006: £0.5m) despite the £0.7m trading loss announced atthe half-year. However, the reported result for the full year is affected by two exceptionalitems. In accordance with international accounting standards, we had beencapitalising the development costs of Posidorm(R), our unique formulation ofmelatonin for sleep disorders. Following our decision to put the development ofPosidorm(R) on hold until we have a co-development partner, we have concludedthat it is no longer appropriate to continue carrying these costs on the balancesheet. We have therefore written off these costs through a one-off £3.4m chargeto the profit and loss account. This is an accounting charge only and has noimpact on the Group's cash position. Securing a co-development partner forPosidorm(R) is still a top priority within Alliance. The other exceptional item is a £0.2m charge relating to reorganisation costs aspart of the strategic changes announced at the half-year. As a result of these two exceptional charges, the reported result for the yearis a loss of £3.2m (2006: £0.5m profit). However, the strong second-halfperformance gives a clear indication of what the new strategy is capable ofdelivering in 2008. Strategy At the start of 2007 it became clear that a change in regulatory procedure wouldadd significantly to the time and cost involved in obtaining registration forPosidorm(R). We also experienced supply problems with three of our products,which cost us an estimated £1m of sales in the first half. Given the immediate impact on sales and the longer-term deferral of prospectiveincome from Posidorm(R), we shifted the emphasis of our strategy to maximisenear-term profitability and cash generation in the trading business. We have suspended development of Posidorm(R) until we have a co-developmentpartner, although work continues unabated on Isprelor(R), our other developmentproduct. In our trading business we implemented a cost reduction programme involving areduction in marketing expenditure, rationalisation of our sales forces and 11redundancies across our operations. This prompt action removed more than £1m per annum of marketing andadministration costs and pre-marketing spend on development products. Thebenefit was evident in the second-half performance. We are satisfied that ourcurrent structure and cost base will be sustainable for the foreseeable future. Our product acquisition strategy has always been to seek out brands that haveestablished demand and cash flows. As a result, reducing our marketing spend hashad a relatively modest impact on ongoing sales. We will continue to operate onthis basis. Where it is profitable to put more marketing weight behindindividual brands we will consider gain-share arrangements similar to oursuccessful partnership with Pharmexx, Europe's largest contract salesorganisation, which is developing new sales channels in the UK for two of ourlarger brands, Forceval(R) and Hydromol(R). Our fastest-growing brand, Hydromol(R), has sustained its growth rate under thisnew strategy. Reducing support for Periostat(R), another of our major brands,has slowed its growth but sharply increased profitability. Overall, theremainder of our brands continue to be very resilient. Our strategy now puts increased emphasis on the trading portfolio as a driver offuture growth and profits. Our business model is fully scalable and we continueto seek opportunities to acquire brands with potential to enhance ourprofitability by generating additional sales volumes through our existinginfrastructure. These efforts should benefit from the rationalisation of cost bases beingundertaken by the larger pharmaceutical players as a result of falling R&Dproductivity and increased pricing pressure. This creates acquisitionopportunities for us as these companies divest older products that no longer fitwith their global strategies. Our Business Development Director is in regularcontact with companies across the Industry to identify suitable candidateproducts. Trading business The supply chain problems that held back sales in the first half of 2007 are nowlargely resolved: Forceval(R) came back into stock in September; Deltacortril(R)production is now rapidly approaching demand levels; and Atarax(R) should beback in supply shortly. For the year as a whole, gross margins were down on the previous year at 49.0%(2006: 53.5%). This reduction was mainly the result of a change in the mix ofsales, but also partly due to a 20% price reduction that was temporarily imposedon Nu-Seals(R) in the Republic of Ireland before being reversed. Exports accounted for 32% of sales in 2007 and our products are now sold in 20countries. The most important development in 2007 was the acquisition ofForceval(R) rights in China from the Administrator of Unigreg Ltd, via a jointventure with the brand's existing Chinese distributor. Alliance has a 60% shareof the joint venture, with the balance held by the distributor. The jointventure took over shipments from April 2007 and sales have developedsatisfactorily through the year. Our joint venture with the local distributorprovides a potential sales platform for additional products to be sold intoChina and we are currently working to identify gaps in the local market that wemay be able to fill. Following the Office of Fair Trading report into the Pharmaceutical PriceRegulation Scheme (PPRS), published in February 2007, the UK Department ofHealth announced in August 2007 that it wished to renegotiate the terms of theongoing 2005 PPRS Agreement only two years into its agreed five-year term.Discussions are expected to conclude in mid-2008, and until then the industryfaces an unwelcome period of pricing uncertainty. We continue to lobby that anyimpact of additional NHS savings should not be borne by older products, such asmany of Alliance's, which have already been subjected to several decreases inthe past and where their cost to the NHS is usually lower than the prescriptioncharge. Development business Development of Isprelor(R), for induction of labour, continues as planned. InJuly it successfully completed Phase III clinical trials which confirmed thatIsprelor(R) has similar effectiveness to the current standard treatment,dinoprostone. It is as well tolerated as the standard treatment, and has theadvantages of being less likely to cause nausea and not requiring refrigeratedstorage. Following discussions with the regulatory authorities we are currentlyperforming certain studies connected with the formulation of Isprelor(R) whichwill increase the robustness of our application for registration. As a result,we expect to file in early 2009, with first royalty revenues likely to flow inearly 2010. We are currently in advanced discussions with potential distributionpartners for Isprelor(R) across the EU. We remain convinced that Posidorm(R) has considerable potential and we willcontinue to search vigorously for a route to complete its developmentcost-effectively. It remains part of our strategy to seek out late-stage development projects withpotential to boost our medium and long term performance over and above thegrowth of our trading portfolio alone. Our approach to investment will remaincautious for the foreseeable future, and we would be most likely to develop suchproducts in partnership. Additionally we are also discussing some opportunitiesto act as marketing partner on projects that offer attractive growth prospects. Outlook We are greatly encouraged by the speed and effectiveness of the turnaround inthe second half of 2007. Modest sales growth can be expected, and the improvedbalance between sales and costs has enhanced our inherent profitability and therate of cash generation. The current year has begun well. Provided that the PPRS review delivers nounexpected setback on pricing, we are confident that the improved profitabilityachieved in the second half of 2007 will be sustainable through 2008. Michael Gatenby John Dawson Chairman Chief Executive 14 March 2008 14 March 2008Financial Review Turnover Turnover in 2007 was £18.2m, up 6% on the previous year (2006: £17.3m). This wasAlliance's seventh successive year of turnover growth, during which time saleshave trebled. This growth was achieved despite the supply difficulties in the first half ofthe year costing an estimated £1m of sales. Sales in the second half of the yearwere £10.4m, up £2.6m on the first half, although the second half was helped byadditional sales of Forceval(R) as wholesalers and pharmacies replenished theirstocks when supplies became available. Profit The gross margin for the year was 49.0%, compared with 53.5% in 2006. Marginswere adversely affected in the first half of the year by a number of temporaryeffects, including a 20% price reduction that was imposed on Nu-Seals(R) in theRepublic of Ireland, though this was reversed in July. Margins recoveredsomewhat in the second half, although they remain below the 2006 level as resultof a change in the mix of sales. Pre-exceptional operating expenses were down 20% year on year. This was partlyas a result of reduced activity on the development side of the businessfollowing the suspension of activity on Posidorm(R) at the start of the year andpartly as a result of the cost reduction programme that was implementedmid-year. This exercise reduced the overhead base by more than £1m per annum ata one-off cost of £0.2m. Before exceptional items, the operating profit for 2007 was £3.6m, up 39% on2006, and profit before tax was £0.4m compared with £0.5m in 2006. As a resultof improved sales, better margins and reduced overheads, profitability (beforeexceptional items) was substantially better in the second half of the year, withoperating profit at £2.9m for the six months and profit before tax at £1.1m. First Second 2007 2006 Year half half 2007 Year 2007 £m £m £m £mTurnover 7.8 10.4 18.2 17.3 Gross profit 3.6 5.3 8.9 9.2 47.1% 50.4% 49.0% 53.5%Operating expenses* (2.9) (2.4) (5.3) (6.6)Operating profit* 0.7 2.9 3.6 2.6Financing costs* (1.4) (1.8) (3.2) (2.1)Profit before tax* (0.7) 1.1 0.4 0.5Adjusted basic EPS (0.86p) 1.31p 0.23p 0.32p(annualised) *Before exceptional items Exceptional items Exceptional items for 2007 comprised a £0.2m charge for the mid-yearrestructuring programme and a £3.4m non-cash impairment charge in respect ofPosidorm(R). Following our decision to put development of Posidorm(R) on holduntil we have a co-development partner, we have concluded that it is no longerappropriate to continue carrying these costs on the balance sheet. We havetherefore written these costs off through a one-off £3.4m charge to the profitand loss account. This is an accounting charge only and has no impact on theGroup's cash position Financing costs Net interest payable increased from £2.2m in 2006 to £2.8m in 2007 as a resultof the additional debt used to finance the latest acquisitions and higherinterest rates. The weakening of Sterling against the Euro in 2007 led to a£0.22m cost on re-translation of the Euro-denominated debt against a £0.06m gainin 2006. There was a £0.03m charge from movement in the fair value of interestrate hedges compared with a £0.11m credit in 2006. Net financing costs for 2007were £3.2m (2006: £2.1m). Earnings per share The adjusted basic EPS for 2007 was 0.23p (2006: 0.32p), depressed by the weakerfirst half year performance. Illustrating the step change in performance sincethe mid-year, the adjusted basic EPS for the second half of the year was 1.31pon an annualised basis. Cash flow With the substantially improved pre-exceptional operating profit of £3.6m and asmall net working capital inflow, cash flow from operations in 2007 was £4.1m,compared with £1.1m in 2006. The amount reinvested in development projects during 2007 was £0.8m, down from£1.9m in the previous year following the suspension of work on Posidorm(R). Intangible assets The acquisition of Forceval(R) rights in China takes intangible assets inrespect of product licences to £35.5m at the year end. In addition, there is£2.6m on the balance sheet for Isprelor(R) development costs. Funding and risk management The £2.0m investment in Forceval(R) rights in China was funded by bank debt,taking total bank loans to £23.5m as at 31 December 2007. Over the year therewas a net reduction in overdraft of £0.2m. The Group uses interest rate swaps to reduce the risk arising from changes ininterest rates and the Convertible Unsecured Loan Stock is at a fixed coupon.Approximately 65% of the gross debt is now subject to fixed interest rates. Aportion of the debt is denominated in Euros as a hedge against the currency riskon revenue from the Republic of Ireland and mainland Europe. Consolidated Income Statement For the year ended 31 December 2007 Year ended Year ended 31 December 2007 31 December 2006 Note £000s £000sRevenue 18,224 17,253Cost of sales (9,291) (8,022)Gross profit 8,933 9,231 Operating expensesAdministration and marketing expense (5,333) (6,595)Share-based employee remuneration 10 (34) (5,323) (6,629) Operating profit before exceptional 3,610 2,602itemsExceptional items 3 (3,576) -Operating profit 34 2,602 Finance costsInterest paid (2,859) (2,171)Interest income 17 16Other finance costs (372) (65)Change in fair value of derivative (30) 110financial instruments (Loss)/profit on ordinary activities (3,210) 492before taxationTaxation - 11(Loss)/profit for the year attributable (3,210) 503to equity shareholders(Loss)/profit for the year attributable (3,210) 503to equity shareholdersEarnings per shareBasic and diluted (pence) 2 (1.98) 0.32 Consolidated Balance Sheet For the year ended 31 December 2007 31 December 31 December 2007 2006 Note £000s £000s £000s £000sAssetsNon-current assetsGoodwill 1,144 1,129Intangible assets- Product licences 4 35,457 33,316- Development costs 4 2,559 5,017Property, plant and 254 297equipment 39,414 39,759Current assetsInventories 1,881 2,852Trade and other 5 4,439 5,224receivablesCash and cash 672 232equivalents 6,992 8,308 Total assets 46,406 48,067 EquityOrdinary share capital 1,621 1,621Share premium account 11,275 11,275Share option reserve 55 65Reverse takeover reserve (329) (329)Other reserve (546) -Retained earnings (5,410) (2,200)Total equity 6,666 10,432 LiabilitiesNon-current liabilitiesLong term financial 21,772 18,452liabilitiesConvertible debt 7,251 7,209Other liabilities 520 940Derivative financial 431 -instruments 29,974 26,601Current liabilitiesCash and cash 3,062 2,839equivalentsFinancial liabilities 1,716 3,031Trade and other payables 6 4,873 5,164Derivative financial 115 -instruments 9,766 11,034 Total liabilities 39,740 37,635 Total equity and 46,406 48,067liabilities Consolidated statement of changes in shareholders' equity For the year ended 31 December 2007 Share Share Shares to Other Retained Total be Capital premium issued Reserves Reserve earnings equity £000s £000s £000s £000s £000s £000s £000s Balance at 1 January 1,621 11,275 65 (329) - (2,200) 10,4322007 Interest rate swaps - - - - - (546) - (546)cash flow hedgeNet expense recognised - - - - (546) - (546)directly in equityLoss for the year - - - - - (3,210) (3,210)Total recognised incomeand expense for the yearEmployee benefits - - (10) - - (10) Balance at 31 December 1,621 11,275 55 (329) (546) (5,410) 6,6662007 Balance at 1 January 1,474 9,031 31 (329) - (2,703)2006 Profit for the year - - - - - 503 503Total recognised income - - - - - 503 503and expense for the yearIssue of shares 147 - - - - - 147Premium on shares issued - 2,244 - - - - 2,244Employee benefits - - 34 - - - 34 Balance at 31 December 1,621 11,275 65 (329) - (2,200) 10,4322006 Consolidated Cash Flow Statement For the year ended 31 December 2007 Year ended Year ended 31 December 2007 31 December 2006 Note £000s £000s Cash flows from operating activitiesCash generated from operations 7 4,064 1,110Tax refund - 11Cash flows from operating activities 4,064 1,121 Investing activitiesInterest received 106 17Payment of deferred consideration (220) (20)Development costs capitalised (776) (1,941)Purchase of property, plant and equipment (100) (128)Proceeds from sales of property, plant 13 12and equipmentPurchase of other intangible assets (2,156) (6,814)Net cash used in investing activities (3,133) (8,874) Financing activitiesNet proceeds from the issue of shares - 2,390Interest paid and similar charges (2,361) (2,030)Loan issue costs (303) (133)Other finance charges paid - (1)Receipt from borrowings 1,950 6,536Repayment of borrowings - (705)Finance lease payments - (12)Net cash received from/used in financing (714) 6,045activities Net movement in cash and cash equivalents 217 (1,708) Cash and cash equivalents at the (2,607) (899)beginning of the period Cash and cash equivalents at the end of (2,390) (2,607)the period 1. Basis of preparation The financial information set out in the announcement does not constitute thegroup's statutory accounts for the years ended 31 December 2007 or 31 December2006. The financial information for the year ended 31 December 2006 is derivedfrom the statutory accounts for that year which have been delivered to theRegistrar of Companies as published on the group's website on 17 April 2007. The auditors reported on those accounts; their report was unqualified and didnot contain a statement under s.237(2) or (3) Companies Act 1985. The statutoryaccounts for the year ended 31 December 2007 will be finalised on the basis ofthe financial information presented by the directors in this preliminaryannouncement. They have not yet been delivered to the Registrar of Companies norhave the auditors reported on them. 2. Earnings per share (EPS) Basic EPS is calculated by dividing the earnings attributable to ordinaryshareholders by the weighted average number of ordinary shares outstandingduring the year. For diluted EPS, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. A reconciliation of the weighted average number of ordinary shares used in themeasures is given below: Year ended Year ended 31 December 2007 31 December 2006 For basic EPS calculation 162,061,774 156,662,902Share options - 34,664For diluted EPS calculation 162,061,774 156,697,566 The adjusted basic EPS is intended to demonstrate recurring elements of theresults of the Group before exceptional items. A reconciliation of the earningsused in the different measures is given below: Year ended Year ended 31 December 2007 31 December 2006 Earnings for basic and diluted EPS (3,210) 503Exceptional items 3,576 -For adjusted earnings per share 366 503 The resulting EPS measures are: Year ended Year ended 31 December 2007 31 December 2006 Pence PenceBasic EPS (1.98) 0.32Diluted EPS (1.98) 0.32Adjusted basic EPS 0.23 0.32 3. Exceptional items Year ended Year ended 31 December 2007 31 December 2006 £000s £000sPosidorm(R) impairment charge 3,374 -Restructuring costs 202 - 3,576 - In the absence of confirmed funding to complete the Posidorm(R) development,development costs that had been capitalised in relation to the project have beenwritten off. The restructuring costs arose out of the strategic review conductedmid-year. 4. Intangible assets Trademarks and Subtotal of Purchased Technical distribution product Development goodwill Know-how rights licences costs Total £ 000s £ 000s £ 000s £ 000s £ 000s £ 000sCostAt 1 January 2007 2,669 14,296 16,351 33,316 5,137 38,453Additions - 159 1,982 2,141 916 3,057At 31 December 2007 2,669 14,455 18,333 35,457 6,053 41,510Amortisation andimpairmentAt 1 January 2007 - - - - 120 120Impairment charge - - - - 3,374 3,374At 31 December 2007 - - - - 3,494 3,494Net book amountAt 31 December 2007 2,669 14,455 18,333 35,457 2,559 38,016At 1 January 2006 2,669 14,296 16,351 33,316 5,017 38,333 Trademarks and Subtotal of Purchased Technical distribution product Development goodwill Know-how rights licences costs Total £ 000s £ 000s £ 000s £ 000s £ 000s £ 000sCostAt 1 January 2006 2,669 10,827 12,005 25,501 3,196 28,697Additions - 3,469 4,346 7,815 1,941 9,756At 31 December 2006 2,669 14,296 16,351 33,316 5,137 38,453Amortisation andimpairmentAt 1 January 2006 - - - - 120 120At 31 December 2006 - - - - 120 120Net book amountAt 31 December 2006 2,669 14,296 16,351 33,316 5,017 38,333At 1 January 2005 2,669 10,827 12,005 25,501 3,076 28,577 5. Trade and other receivables 31 December 2007 31 December 2006 £000s £000sTrade receivables 4,102 4,671Other receivables 107 104Prepayments and accrued income 230 449 4,439 5,224 6. Trade and other payables - current 31 December 2007 31 December 2006 £000s £000sTrade payables 2,151 3,298Other taxes and social security costs 352 496Accruals and deferred income 1,930 1,150Amount owed to joint venture 20 -Other payables 420 220 4,873 5,164 7. Cash generated from operations Year ended Year ended 31 December 31 December 2007 2006 £ 000s £ 000sResult for the year before tax (3,210) 492Interest paid 2,859 2,171Interest income (17) (16)Other finance costs 372 65Change in fair value of derivative 30 (110)financial instrumentsDepreciation of property, plant and 138 112equipmentChange in inventories 971 (112)Profit on disposal of fixed assets (8) (12)Change in trade and other receivables 785 (2,189)Change in trade and other payables (1,220) 675Write-off intangible assets 3,374 -Share options charges (10) 34Cash flows from operating activities 4,064 1,110 This information is provided by RNS The company news service from the London Stock Exchange